Wall St. Breakfast's Pre-Market Snapshot:
U.S. Futures As of 8:55 AM ET
S&P 500: +26.50; 1,451.00
NASDAQ 100: +31.00; 1887.50
Dow: +180.00; 13,124.00
NIKKEI 225: -5.42%; 15,273.68 (-874.81)
HANG SENG: -1.38%; 20,387.13 (-285.26)
SHANGHAI SE COMPOSITE: -2.28%; 4,656.57 (-108.87)
BSE SENSEX 30: -1.51%; 14,141.52 (-216.69)
FTSE 100: +0.11%; 5,865.10 (+6.20)
CAC 40: +2.37%; 5,390.15 (+124.68)
XETRA-DAX: -0.20%; 7,255.43 (-14.64)
Commodity Futures (Reuters/Jefferies CRB)
Oil: +0.94%; $71.67 (+$0.67)
Gold: +0.52%; $661.40 (+$3.40)
Natural Gas: +2.36%; $7.04 (+$0.16)
Silver: +1.44%; $11.660 (+$0.165)
U.S. Breaking News — see today's Wall Street Breakfast for earlier news
The Fed Steps In
Futures surged Friday after the Fed said in an unscheduled announcement it was cutting its discount rate to 5.75% from 6.25%, and is prepared to take further measures in order to narrow the spread between the primary credit rate and the targeted federal funds rate. "These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially," it said. "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably." In response to a recent trend of banks refusing to accept credit portfolios as collateral (full summary), the Fed remarked, "The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets," adding that, "These changes are designed to provide depositories with greater assurance about the cost and availability of funding." S&P 500 futures are up 29 points to 1453, while Dow futures surged to +195 at 13141 as of 8:50 a.m. ET.
Sources: Press release I, II
Commentary: Buffett Blames Lenders, Not the Fed • Waiting For 'Calamity' to Justify an Interest-Rate Cut: Has That Time Come? • A Stealth Fed Rate Cut? • Now's The Time For A Fed Rate Cut
Stocks/ETFs to watch: DIA, SPY, AGG
Surging Yen Sinks Japanese Stocks, Nikkei Plummets 5.4%
The yen strengthened further against a basket of the world's major currencies, as yen carry traders continue to rush to the exits with concerns over credit market liquidity spreading globally. The Nikkei 225 dropped 5.4%, the most in seven years, due to the stronger yen and renewed worries about the U.S. economy. Deutsche Bank told clients the performance in Japan was "dire," since Japanese equities have been lagging regional and global indices and failed to rally despite the late Thursday recovery in the U.S. DB expects more yen strength. UBS said its Risk Index reached a record high of 3.07, exceeding readings after 9-11 and the collapse of Long-Term Capital Management. Volatility of dollar-yen options reached 23.5%, the highest level since January 1999. The regional strategy head at Daiwa Institute of Research in Hong Kong commented, "Nobody expected such a fast appreciation," which "caused a huge sell-off in export related stocks such as autos and high-techs." Shares of Canon dropped 8.6%, Honda fell 8.2%, Toyota lost 7.2% and Sony declined 6.8%.
Sources: Bloomberg, MarketWatch
Commentary: Citigroup: Asian Markets Not Less Vulnerable To Global Credit Crunch Than In 1998 • Heavy Selling Spreads Across Asia; Yen Carry Trade Unwinds • Japan: Q2 GDP Slows; BOJ Rate Hike Less Likely
Stocks/ETFs to watch: TM, HMC, CAJ, SNE, MTU, MFG. ETFs: EWJ, FXY
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Today's Market (via Sam Collins, ChangeWave.com)
b>Recap of Yesterday's Action
Talk about volatility! The Dow Jones Industrial Average had a range yesterday of more than 350 points and traded a range of 250 points three times before settling in virtually unchanged from Wednesday's close.
With just 50 minutes left in the session, the Dow regained better than 200 points and that followed the session's low -- qualifying it and the other major averages as having reached a full 10% decline or "technical correction" from the July highs. But whatever you choose to call it, it has rattled the confidence of The Street, and despite the impressive turnaround, made many wonder if the worst is yet to come.
Financials led the way yesterday as Bear Stearns (NYSE:BSC) bounced by an impressive 12.9% after it said that it may get new funding from Chinese banks. And JPMorgan Chase (NYSE:JPM) and American Express (NYSE:AXP), all Dow components, had strong days helped by Fitch who said that U.S. brokers were "well funded and have sufficient capacity to absorb losses from marking their assets to market." But mortgage companies are still in deep trouble as confirmed by S&P's cut of Countrywide Financial's (CFC) credit rating and Moody's (NYSE:MCO) cut of Residential Capital LLC, of which GM owns 49% (GM fell by 2.4%).
The Federal Reserve continued to support the credit markets by adding another $12 million to the banking system, and Treasury Secretary Henry Paulson said that the recent subprime problems will hurt U.S. economic growth but won't lead to a recession.
At the close, the Dow Industrials were off 16 points at 12,845. The S&P 500 gained five closing at 1,411, and the Nasdaq fell by eight to close at 2,451. Volume was heavy on both exchanges with the Big Board trading 2.9 billion shares, and at the Nasdaq 3.4 billion shares traded. Declines were ahead of advances on both exchanges by 20/13 on the New York and 17/13 on the Nasdaq.
Crude oil (September contract) fell $2.33 to close at $71 a barrel and the Amex Energy SPDR (NYSEARCA:XLE) lost 52 cents, closing at $65.10 but reversing from just above its 200-day moving average. Gold tumbled as well as assets of many classes were sold to meet liquidity shortfalls. The December contract was down $21.70 to $658 an ounce and the Philadelphia Gold/Silver Index [XAU] fell by $6.80 to $125.64.
What the Markets Are Saying
Early yesterday, the S&P 500 opened lower extending Wednesday's penetration of the support line at 1,460 and driving to within just 4 points of the March low before reversing and closing higher. This reversal is significant but can't be considered a major trend reversal yet. But, the move is encouraging and is confirmed by a stochastic buy and our own internal indicator [CBR].
Intraday on Thursday, the CBOE Volatility Indicator [VIX] got suspiciously close (37.50) to the generally accepted reading of 40, which most consider an indication of excessive fear and thus a bottom. Sentiment now is extremely bearish. The American Association of Individual Investors [AAII] Bullish/Bearish reading is now at 42% bullish and 46% bearish, and this is a flip-flop after four weeks of bullish readings.
But Thursday's low at 1,370 must be tested before it can be authenticated as a genuine double bottom, so for now the best thing to do is to wait it out until we have a confirmed bottom. Volatility is going to be high, so strap on your seat belt.
Today's Trading Landscape
Smucker's (NYSE:SJM) is the only earnings report of consequence today, and the sole economic report is from the University of Michigan's Confidence Index (the consensus expects 88.0). Again the focus will be on the credit markets as investors try to determine the extent of the subprime damage. Futures are down this morning, and the Asian markets sharply lower, so the technical focus will be on yesterday's reversal low and whether or not it will hold.
Asian Headlines (via Bloomberg.com)
• Australia's Central Bank Buys Currency for First Time Since 2001 Amid Rout Australia's central bank bought the nation's currency for the first time in six years to stem the steepest drop since it was allowed to trade freely in 1983.
• Mitsukoshi May Merge With Isetan to Form Japan's Largest Department Store Mitsukoshi Ltd. said it's in takeover talks with Isetan Co. to form Japan's largest department-store chain after sales in the industry slumped for a ninth year.
• Westpac Names St.George Bank's Kelly to Replace Morgan as Company Chief Westpac Banking Corp. (NYSE:WBK), Australia's oldest bank, hired Gail Kelly as chief executive officer after she more than doubled profit at smaller rival St.George Bank Ltd.
European Headlines (via Bloomberg.com)
• Stocks in Europe Head for Fifth Weekly Drop; Rio Tinto, BHP Billiton Fall European stocks fell, heading for a fifth week of declines, on concern losses in global financial markets will erode economic growth.
• ECB Should Scrap Plan to Raise Interest Rates After Rout, Economists Say The European Central Bank should scrap plans to raise interest rates in September after markets around the world plunged, economists said.
• WPP Earnings Climb 2.9 Percent on Growth in China, India, Emerging Markets WPP Group Plc, the world's second- biggest advertising company, said first-half profit rose 2.9 percent, boosted by at least nine acquisitions in China and India and faster growth in the U.S.
• European Bonds Set for Biggest Weekly Gain Since Sept. 11 Terror Attacks European two-year notes are poised for the biggest weekly rally since the terrorist attacks on Sept. 11, 2001, as credit turmoil prompts banks to withdraw cash from money markets and companies seek emergency funding.